We can all thank the booming prices of iron ore and hard coking coal and softening but still high prices for thermal coal and LNG for the budget largesse tossed around last night by Treasurer Josh Frydenberg.
The surge in commodity prices and our highest terms of trade since 2011, plus the still solid labour market have financed the return to surplus via higher taxes, with the addition of a large dose of bracket creep in tax payments and the crackdown on income tax payments by the Tax Office.
The reality is that the outlook for the Australian economy remains mixed to lacklustre compared with a year ago with the government trimming growth forecasts even though the terms of trade continue to reflect the solid boom in export income, especially from iron ore, coal, LNG and services (such as education and tourism), all boosted by the weak dollar at around 71 US cents.
GDP forecasts for 2019-20 and 2020-21 have been revised downward from 3% to 2.75%. The budget revised down Australia’s economic growth for 2018-19 to 2.25%, compared to 2.75% just six months ago and just under the 2.3% growth rate for calendar 2018.
Forecasts for gross domestic product growth for the following two years of 2.75% are 0.25% lower than the government’s previous financial update.
Treasury still forecasts 5% unemployment for the next few years (even though its 4.9% currently and the Reserve Bank sees it dipping to 4.75% in the next year).
Wages remain this government’s blind spot with what looks like another overestimation.
Wages growth forecasts have also – yet again – been revised down, and household consumption has also been revised down to 2.75% compared to the 3% forecast in the mid-year forecast in December and 3.25% in the May 2018 budget statement of then treasurer, Scott Morrison.
The Wage Price Index is currently at 2.3% and looks like finishing 2018-19 around that level (perhaps 2.4%) by June 30 which will be well short of the May and December forecasts.
The budget forecasts wages to grow by 3.25% in 2020-21 which is too optimistic as well seeing the Reserve Bank sees wage growth at 2.5% in the same year (which is the same as the forecast for the current 2018-19 financial year).
Wage rise forecasts have been too optimistic throughout the Coalition’s term since the 2013 election win by Tony Abbott.
Other key forecasts are also mixed. Consumer Price Inflation is unchanged at 2.25%, but the current rate is around 1.8% and the Reserve Bank yesterday only sees it edging up to 2% by the end of this year.
Nominal GDP is forecast to rise by 3.25% (3.5% in the mid-year forecast in December), but it finished 2018 at an annual rate of 5.5% in the December quarter. The higher rate of growth in nominal GDP is explained by the surge in commodity export revenues in the past 9 months.
Terms of trade are forecast to fall 5.25% (-6% previously) but the expected high level of iron ore prices for much of this year and higher than expected hard coking coal prices could mean that doesn’t happen. The terms of trade are currently at their highest since the 2011 boom
Household consumption is forecast to rise by 2.75% (3% previously) and it’s that, plus the health of the jobs market, that is worrying the RBA most of all and pushed it to the edge of a possible rate cut. This lowered forecast compares to the RBA’s forecast for 2019-20 (in February) of 2.6%.
Dwelling investment is forecast to fall by 7% (-4% previously) which won’t surprise anyone the way dwelling approvals (ignoring the skewed figures for February on Tuesday, home loans and falling prices in Sydney and Melbourne are trending.
The tax cuts promised, while a poor substitute for a solid pay rise, will help consumers keep spending help the weak retailing sector.
People earning between $925 and $1730 a week will get a tax cut equivalent to about $20 a week, backdated to July last year.
But it will come in the form of an annual tax refund cheque after submitting their return in a few months time – that is $1080 higher than otherwise.
People earning less than $925 a week, or more than $1730 a week, will get lower refunds.
The government claims it will eliminate Australia’s $373 billion net debt by 2030, but that’s useless being 11 years away (which is in fantasy land).
And it’s a bigger than expected surplus with Josh Frydenberg announcing the surplus comes in at $7.1 billion, above expectations.
Surpluses will be 1% of GDP within a decade, the Treasurer claimed. That’s also fantasy because he can’t forecast the future, especially when the global economy remains patchy to weak.
The further projected surpluses are $11 billion for 2020-21, $17.8 billion in 2021-22 and $9.2 billion for 2022-23.
